Knight says loss may spur rules to prevent ‘knucklehead’ errors

‘Deeply Embarrassed’

Joyce, who is also chairman of Knight, said he was “deeply embarrassed” his company’s Aug. 1 fiasco added to mishaps such as Nasdaq Stock Market’s botched initial public offering of Facebook Inc. that helped fray retail investors’ confidence in markets. A software bug that went undetected led Knight to generate orders “unrestricted by volume caps,” he said.

More than 90 percent of clients using Knight’s market-making and broker-dealer services are again trading with the firm, Chris Allen and Joe Recendez, analysts at Evercore Partners Inc., wrote in a Sept. 5 note. More than 70 percent of institutions have also returned, with more expected after “internal credit reviews” are conducted this month, they said.

Knight shares rose 1.1 percent to $2.70 today in New York trading. The stock is down 74 percent since the day before the software error.

Trading curbs implemented after the May 6, 2010, flash crash in which the Dow Jones Industrial Average plunged 9.2 percent before recovering, temporarily halt stocks if they fall 10 percent within five minutes. Joyce said regulators may consider extending the so-called single-stock circuit breakers to securities experiencing unusual trading volume.

“I do think we will have a regulatory review of volume circuit breakers and a regulatory review of how one handles an error,” Joyce said. “Make no mistake -- this was an error.”

NYSE ‘Hamstrung’

While the New York Stock Exchange was willing to consider canceling more trades for stocks listed on its market during Knight’s problems on Aug. 1, the Securities and Exchange Commission nixed the idea due to transaction-voiding rules enacted after the May 2010 plunge, Joyce said. The regulations “hamstrung” NYSE, he said.

Kill switches, or mechanisms that enable an exchange or broker to shut off all trading from a firm, are also likely prospects as regulators and industry participants review problems such as the Knight technology glitch, Joyce said. He cautioned that stopping all trades from a firm when a problem occurs in one business segment could hurt clients operating through another unit.

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